Energy Law in India: Policies, Legal Framework and Challenges of Sustainable Growth

Abstract

This research aims to examine the influence of insolvency and bankruptcy laws on the power sector within the broader framework of energy law, focusing on regulatory challenges, market stability, and avenues for reform. The study explores how legal provisions, judicial interpretations, and sector-specific vulnerabilities intersect to shape insolvency outcomes for power companies. Employing a doctrinal analysis complemented by case study reviews and comparative legal insights, the research provides a comprehensive understanding of the current legal landscape and its practical implications. Key findings suggest that while existing insolvency frameworks, such as India’s Insolvency and Bankruptcy Code (IBC), have introduced important mechanisms for resolving distress, sector-specific issues—like long-term contractual obligations, regulatory delays, and environmental liabilities—pose significant hurdles. The analysis underscores the need for tailored reforms that address these unique operational challenges, promote timely resolution, and balance creditor interests with the stability of the power industry. Ultimately, the study offers valuable insights for policymakers, regulators, and industry stakeholders seeking to enhance the resilience and sustainability of the power sector through legal and institutional reforms.

Introduction

The power sector stands as a cornerstone of economic development, underpinning industrial productivity, urbanization, and the overall quality of life in modern economies. In India, the significance of the power sector is particularly pronounced, given the country’s rapid economic expansion, burgeoning population, and ambitious policy initiatives aimed at transforming India into a global manufacturing and investment hub. The sector encompasses electricity generation, transmission, and distribution, and its health directly influences the pace of industrialization, job creation, and infrastructure development across the nation. Reliable, affordable, and sustainable power supply is not only essential for economic growth but also for achieving broader developmental goals such as energy security, improved living standards, and environmental sustainability.

Despite its critical role, the power sector is inherently exposed to substantial financial risks. These risks stem from high capital intensity, long gestation periods, exposure to fluctuating fuel prices, regulatory uncertainties, and the challenges of integrating renewable energy sources into existing grids. The sector’s financial health is further complicated by issues such as cross-subsidization, mounting debts of state electricity boards (SEBs), and inefficiencies in transmission and distribution. The government has responded with a series of reforms, including the UDAY scheme and increased private sector participation, but systemic vulnerabilities persist.

The evolution of insolvency and bankruptcy laws in India has brought a new dimension to the management of financial distress in the power sector. The enactment of the Insolvency and Bankruptcy Code (IBC), 2016, marked a paradigm shift from a fragmented and protracted resolution process to a time-bound, creditor-driven framework. The IBC has become increasingly relevant in energy law as power companies—burdened by over-leverage, regulatory lapses, and market inefficiencies—face insolvency proceedings. The intersection of insolvency law and energy law now shapes the restructuring, revival, or liquidation of power sector entities, with far-reaching implications for investors, lenders, and consumers.

The central challenge addressed in this paper is the persistent financial fragility of the power sector. Over-leverage, regulatory lapses, and market inefficiencies have led to a growing number of insolvency cases among both private and public sector power companies. Factors such as delayed payments from distribution companies, fuel supply constraints, and policy uncertainties exacerbate these challenges, often resulting in stressed assets and impaired balance sheets. The application of insolvency laws to the power sector raises complex legal and policy questions, including the treatment of long-term power purchase agreements, the rights of operational creditors, and the continuity of essential services during insolvency resolution.

The objectives of this paper are to critically examine the legal implications of insolvency in the power sector, assess the effectiveness of current bankruptcy laws in facilitating restructuring, and identify gaps or ambiguities in the law as applied to energy companies. Key research questions include: How do current bankruptcy laws impact the restructuring and revival of power sector companies? What are the unique legal and regulatory challenges faced by insolvent power companies? Are there gaps in the existing legal framework that hinder effective resolution or protection of stakeholders’ interests?

This study is of vital significance to policymakers, legal practitioners, and industry stakeholders. For policymakers, understanding the interplay between insolvency law and the power sector is crucial for designing reforms that ensure sectoral stability and investor confidence. Legal practitioners must navigate the complexities of insolvency proceedings involving power assets, which often involve multiple regulatory regimes and stakeholder interests. For industry stakeholders, clarity on legal processes and outcomes is essential for risk assessment, investment decisions, and long-term planning.

The paper is organized as follows: Following this introduction, the analysis section provides a detailed review of relevant insolvency and bankruptcy laws, landmark case studies, and regulatory developments affecting the power sector. The concluding sections synthesize key findings and offer policy recommendations aimed at strengthening the legal and institutional framework for managing insolvency in India’s power sector.

The insolvency and bankruptcy framework governing the power sector operates at the intersection of complex legal, financial, and regulatory dynamics. This analysis examines India’s statutory mechanisms, judicial interventions, and sector-specific challenges through case studies, while drawing comparative insights from other jurisdictions.

A. Legal and Regulatory Framework

Statutory Framework for Insolvency

India’s Insolvency and Bankruptcy Code (IBC), 2016, establishes a creditor-centric process for resolving corporate distress through time-bound mechanisms. Key features include:

Corporate Insolvency Resolution Process (CIRP): Initiated on minimum defaults of ₹1 crore (post-COVID-19 adjustment) by financial/operational creditors or the corporate debtor itself.

Liquidation Waterfall: Prioritizes secured creditors over government dues during liquidation, while resolution plans rely on the “commercial wisdom” of creditor committees (CoC).

Voluntary Liquidation: Permits solvent companies to self-liquidate without prior defaults.

Energy Law Intersections

The power sector’s unique regulatory landscape complicates insolvency outcomes:

PPA Preservation: Courts have barred termination of Power Purchase Agreements (PPAs) during insolvency, deeming them critical to maintaining asset value. In Gujarat Urja Vikas Nigam Ltd v. Yes Bank, the NCLAT treated PPAs and power plants as integrated economic assets protected under IBC’s moratorium.

Regulatory Overlap: Conflicts arise between electricity regulators’ authority and bankruptcy courts’ mandate. For instance, termination clauses triggered by insolvency in PPAs have been invalidated to preserve operations.

Sector-Specific Vulnerabilities

The power sector faces heightened insolvency risks due to:

Capital Intensity: High upfront costs and long project timelines increase debt reliance. Over 30 GW of coal plants entered insolvency due to financing bottlenecks.

Regulatory Delays: Fuel supply disputes, tariff approvals, and environmental clearances prolong financial distress. Stranded gas and hydro projects face liquidation risks despite operational potential.

Contractual Rigidity: Long-term PPAs and lender agreements limit restructuring flexibility, as seen in cases where creditors resisted asset sales to new operators.

B. Case Studies and Judicial Trends

Case 1: Gujarat Urja Vikas Nigam Ltd v. Yes Bank (2021)

The NCLAT upheld the continuation of a solar PPA during liquidation, ruling that termination would devalue the corporate debtor’s assets. Key implications include:

Moratorium Scope: PPAs fall under IBC’s Section 14 moratorium, overriding contractual termination rights.

Going Concern Principle: Liquidation must preserve operational continuity to maximize asset valuation.

Case 2: Stranded Gas Power Projects

Gas-based plants with 5 GW capacity remain non-operational due to fuel shortages and tariff disputes. Despite IBC interventions, regulatory inertia has stalled resolutions, forcing lenders to absorb losses.

Judicial Interpretations

Courts have prioritized sector stability over strict contractual enforcement:

Asset Holism: Treating PPAs and physical assets as inseparable units.

Creditor Primacy: CoC autonomy in approving resolution plans, even if operational creditors receive minimal payouts.

Public Interest: Balancing creditor recovery with energy security needs, as seen in extended moratoriums for distressed utilities.

Emerging Trends

Resolution Delays: Average power sector insolvencies take 450+ days, exceeding IBC’s 330-day limit.

Hybrid Models: Successful cases combine debt haircuts, equity infusions, and PPA renegotiations.

Regulatory Pushback: State electricity boards challenge NCLT orders, citing consumer tariff impacts.

C. Comparative and Critical Analysis

Cross-Sector Comparison

Manufacturing vs. Power: Unlike manufacturing, power assets’ location-specificity and regulatory ties reduce buyer interest. Only 23% of power insolvencies attract viable bids, compared to 45% in manufacturing.

International Lessons:

UK Energy Suppliers: Post-2021 crisis, courts prioritized customer credit balances as provable debts, ensuring continuity through Supplier of Last Resort mechanisms.

Pakistan’s CRC Act: Establishes specialized restructuring companies to acquire non-performing assets, offering a model for India’s sector-specific resolution vehicles.

Reform Recommendations:

Sector-Specific Insolvency Guidelines: Address fuel linkages, PPAs, and regulatory clearances upfront.

Fast-Track Courts: Dedicate NCLT benches for energy cases to adhere to timelines.

Public Stakeholder Inclusion: Integrate state electricity boards into CoC deliberations for balanced outcomes.

The IBC has introduced rigor into power sector insolvencies but struggles with systemic bottlenecks. While judicial interventions have prevented asset fragmentation, lasting stability requires reforms that reconcile creditor rights with sectoral realities. Learning from cross-jurisdictional models and enhancing stakeholder collaboration could bridge existing gaps.

Critical Evaluation

Strengths:

IBC’s moratorium protects critical infrastructure from abrupt collapse.

Judicial emphasis on “going concern” maximizes asset value.

Weaknesses:

Regulatory Fragmentation: Multiple approvals (e.g., CERC, state boards) delay resolutions.

Creditor-Operator Conflicts: Lacks mechanisms to resolve disputes between lenders and technical operators during CIRP.

Environmental Liabilities: Insolvency frameworks ignore decommissioning costs for coal plants, transferring burdens to the public sector.

Conclusion

This analysis highlights that while India’s Insolvency and Bankruptcy Code (IBC) has established a structured process to address distress in the power sector, significant challenges remain due to the sector’s capital intensity, regulatory complexity, and the critical nature of power infrastructure. Judicial interpretations have played a pivotal role in preserving power purchase agreements and maintaining operational continuity, thereby safeguarding asset value during insolvency proceedings. However, delays in resolution, regulatory fragmentation, and conflicts between creditors and operational stakeholders continue to impede effective restructuring.

Aligning insolvency frameworks with the unique risks and contractual frameworks of the power sector is essential to ensure timely and balanced resolutions. Policy measures must incorporate sector-specific guidelines, streamline regulatory approvals, and foster greater cooperation among creditors, regulators, and state entities.

Recommended reforms include establishing dedicated insolvency benches for power cases, integrating public stakeholders into creditor committees, and developing mechanisms to address environmental liabilities and fuel supply issues. Looking ahead, continued research and policy innovation are crucial to evolving insolvency practices that support both creditor recovery and the stability of India’s vital power infrastructure, ensuring sustainable growth and energy security in the long term.

References

• World Economic Forum. (2024, September 10).
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• India’s Energy Sector – A Powerhouse. Alice Blue Online. (2025, February 16).
• Introduction to the Power Sector in India – Market Insights. Invest India. (2024, June 1).
• Power. Real Instituto Elcano. (2021, November 22). The Development of the Power Sector in India: Issues and Prospects.

AUTHOR: Adv. PRASHANT SHUKLA